This is the second part in a five-part series of posts that lay out the basics of what we are trying to build with Catallax. The series will follow the following schedule and I’ll update the list with links as the articles go live:
The blockchain is really an amazing invention. We’ve had public books and public ledgers for a while, but having one that is unchangeable is a really amazing evolution. Catallax will use this ledger to help reduce the risk of investment. We anticipate this will accelerate the flow of capital to riskier ventures than the market will currently bear.
The mechanism is to do this is called ‘folding the blockchain’. As we mentioned in part 1, we are going to have a backwards flow of pref payments going from accounts that have received cash to those that have paid in cash. Because we want this money to flow efficiently we need to handle a couple of scenarios so that our cash doesn’t get ‘stuck’ in the system.
The first situation to handle is the death of an account holder. To handle this we can mark an account as a ‘passthrough’ account. This has a couple of effects. The first is that any pref payments that come into this account will pass through directly to pref owners in the account without having to wait around for Catch Up. The second is that this passthrough will avoid any sort of taxation. We will talk more about taxation in part 4 of this series, but for now just know that it is possible for these pref payment flows to be taxed. By marking an account as passthrough we are creating a temporary ‘folding of the blockchain’ that keeps our cash flowing efficiently. For individuals, pass-through will be a temporary feature while an account is in the probate process.
Eventually, these accounts can be completely dissolved via a legacy platform that is just in the beginning stages of development. The guiding principle is to hold a long/short position on becoming wealthy. We want to reward the legacy of individuals while guarding against capital concentration. I will not go into much more detail about this here but you read more in the Legacy chapters in my book Immortality (Buying a physical/kindle copy helps support this project).
A similar process of passthrough/probate legacy can be implemented for legal entities in a way that drastically reduces the risk of investment in new ventures. To understand how this works let’s look at the following scenario:
Susan wants to start a company to compete with facebook. She has a great mvp and some sort of unfair advantage that makes it a possibility that she could compete. It is still a risky venture and Susan is only able to find one Venture Capital firm that will fund her. Venture Co. agrees to invest $1 million catallaxian bucks in Susan Co. Susan takes the cash infusion and spends the money on:
Bob, a developer: $100,000
Amazon Web Services $500,000
Real Co., An office leasing company $50,000
PR Co., A PR firm that handles their advertising, $350,000
After a year Susan Co. decides that they had a failed proposition. They have yet to earn a dime and are out of cash. Poor Susan Co. And Poor Venture Co. Their investment is now worth nothing except what they can get for the tech that Bob developed. But in a Catallaxian economy, their downside is somewhat limited.
By dissolving Susan Co and ‘folding the blockchain’ over the company, the prefs that Susan Co. owned in Bob, AWS, Real Co., and PR Co. can be given to Venture Co. All of that cash went somewhere, and because of the blockchain, we know exactly where it went. Venture Co. has their risk reduced by the cash that flows back to them from these four organization over the next X years. X is dictated by how fast their pref position in these organizations is diluted.
If PR Co. goes on to be a billion dollar PR firm, Venture Co. could end up making back their entire investment.
In a traditional economy, when the money is gone it is just gone. As a result, investors tend to look for a certain risk profile. Innovation is driven in some proportion by the risk investors are willing to take. By reducing the risk profile of investments we should be able to accelerate the rate of innovation.
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